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Price dislocation

I remember when I first started drinking puerh seriously almost ten years ago, a common argument that you see around the internet (Chinese, mainly) and among drinkers is that it’s cheap, so it’s worth bothering with. Oftentimes the comparison was with longjing – one jin of longjing was probably somewhere in the ballpark of 1200-2000 RMB back in the day, whereas the equivalent of good quality puerh was only a few hundred RMB. It was simply a lot cheaper to drink puerh, and so even if you have no intention of aging the tea, of dabbling in the aged tea market, of wanting to drink that taste, you can still enjoy good quality tea for a lot less money.

Fast forward ten years, the price for longjing has probably doubled in this period. At the same time, however, the price for newly made, good quality raw puerh has probably risen by about tenfold. Old tree teas from famous areas harvested during the spring now routinely command 2000+ RMB (and often much higher) per 357g cake. The value argument for buying new puerh to drink compared to other types of teas in the market has simply vanished in the past ten years. Yes, there are much cheaper cakes out there. You can still find, albeit with some difficulty now, cakes that sell for under 100 RMB a piece, but those appear far less frequently than before, and you can rest assured that the chances of finding quality tea among that pile of nameless and faceless cakes is quite low, much worse than before.

The interesting thing here is that prices for teas you can buy off websites that sell teas in English have risen by much, much less than what you can find in the markets here. Prices for some vendors have edged up a bit compared to previous years, and they have, just as mainland vendors have done, used tricks like making smaller cakes to make the sticker-shock less shocking. Nevertheless, it seems to me that there is a sort of glass ceiling for prices for new make puerh that is somewhere in the ballpark of $150 USD a cake. You almost never see that price point breached. Even for older teas, I very rarely see things that cost much more than about $200 a cake, which severely limits the options of what can be sold. In casual conversations with a few vendors about this, it’s pretty apparent that the market simply isn’t really ready to pay this kind of prices for tea, and when they do, it’s overwhelmingly in samples sales only, which doesn’t amount to much.

When you think about it, this necessarily means that something is going on with the quality of the leaves going into the cakes. One would be to lower the cost basis by using leaves from cheaper regions, but by and large, cheaper regions are cheaper for a reason. Laoman’e is cheaper not just because it’s less famous, but it’s seen as less age-worthy because it’s bitter. Vendors can also mitigate the rise in cost by using leaves from lesser trees from the same region. Whereas gushu teas are very expensive, you can often find leaves from younger trees (50-100 years old ones, or even younger) that cost a lot less.

It’s not just the price of raw materials that went up. Labour costs for everything in China has gone up. When I stayed in Beijing in 2006 for a year, the going rate for a teashop girl (and they’re almost all girls) was about 600-700 RMB a month, plus room and board. These days you’d be lucky to find someone for much below 2000. So while it is most certainly the case that the raw materials of the tea going into the cakes have gone up in prices, everything else has adjusted up too. You also have to remember that whereas in 2006 one USD was worth about 8 RMB, these days it’s only 6.24 RMB, which means everything, automatically, has gone up by about 25% before you even lift a finger.

The situation is definitely worse in the cases of vendors who have high cost structures – the need to maintain a brick and mortar shop, the need to buy long haul international plane tickets (and shipping the tea back to their home base), so on so forth. If the price for the tea they can sell hasn’t gone up much, and if the cost of any of these other things haven’t gone down much (they haven’t) then the only place they can squeeze out a profit is to lower their cost by using cheaper raw materials.

This kind of inflation is of course a direct consequence of China’s rapid economic development. There are very few things in our normal day to day life that has price rises of this sort – the only thing that we normally buy that goes through severe price fluctuations is oil. Even then, it’s only in the US where the gas prices reflect real changes in oil prices – in most developed countries tax is such a big part of the price of gasoline that the net effect of oil price changes resulting in an increase in pump prices is smaller. In other words, none of us, on a day to day basis, buy anything in our daily life that has shifted in cost and price as much as the puerh we’re buying.

So whereas in 2006 if someone posts on an internet forum, saying they want to buy a decent cake of tea for under $50, there were a lot of decent options, these days if you want a cake for under $50 that will age well, chances are you really have to scrape the bottom of the barrel, and even then the likelihood of finding something good is slim. As I’ve mentioned previously, the best bet is for teas that are 1) from before 2010 and 2) from vendors who don’t know current prices, and even then, one has to be very selective. Trying to find a new 2014 tea that’s under that price? Well, as a point of comparison, my new 2014 Dayi 7542 that I just bought cost me a bit over 30 USD. Dayi, of course, commands a premium over other brands, and I didn’t bother bargaining for one cake, but the fact is this cake, 10 years ago, would’ve cost about maybe 4-5 USD a cake. High prices are here to stay, so while it pains me to say this, as consumers we have to be aware that a dollar now is not like a dollar a few years ago, and we need to adjust our expectations accordingly. Otherwise, all you’ll get offered to buy are from the trash heap that nobody would want to buy in China itself.

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Price dislocation — 15 Comments

Kind of too bad; one of the things about the low price was that it let you try stuff more easily, and keep stuff to learn about aging. If it means that the tea farmers get paid a more fair wage, though, then I’m happy about that. Hopefully the lower cost of overhead for the digital age will help offset some of these prices, once everyone gets used to buying online.

The effect of the online market (combined with improving economy in China) is something that I’ve wondered (and worried) a lot about. It’s a bit of a segue, but I worry about what it’s going to do to the availability of good tea in the future (wulong being at the front of my mind in this regard).

There’s only so much space in places like the Wuyi reserve. There’s a surprising number of people that are still afraid to buy anything online (they think that they’re more likely to get their card number stolen). As people become more comfortable buying online, and people having more money from improving economies, the demand will probably grow. Since they can only make so much of the good stuff, I worry that it’s going to get harder and harder to get good tea.

So I think you’re probably right. Online stores have less overhead, which reduces prices for things that can be made in ample supply, but the raising prices of tea are going to be due to increased standards of living/wages and to balance the finite supply with demand (granted, I’m sure they’ll be able to produce more good stuff in some areas/for some teas).

I did see an article recently about this year’s longjing having lower prices because the govt isn’t buying for employees, so hopefully there will be factors like that that can counter-balance some of these things.

The only other thing we can hope for is people coming to the conclusion that good tea requires too much work to learn about, and that they can improve the quality and quantity of mid-grade stuff to satisfy those that won’t get too far into tea.

All that factory tea in the first decade of the century, particularly 2006 and after, will be what drives the industry at some point, with emphasis on successful storage. The $150-$300 mark will be a source of gravity for gushu, with the main consequence being that non-elite gushu prices will soften, and some sort of AOC vision will finally start pulling through, in order to save high prices for the better gushu.

I simply don’t think that buying cakes for $300 is a sustainable practice consumer broad and time depth, and I view the current support as being faddish and short term. The good stuff will aways be above $300 and way upwards, but I think that we will have a narrowing of what is “good stuff”.

You really think the likes of Yulin, Hopewell Chang, Fujin, CSH, that they all can sustain high prices as progressively more people find out about what good tea is? Do you really think Bingdao has that much of a edge that all the stuff that approximates Bingdao can maintain high prices? How about non-top Mengsong, Banpen, or the non-top Lao Man’E? Frankly, it’s pretty likely it’s going to be back to Yiwu areas and Menghai areas, with dotted production from the top places elsewheres.

There’s a whole class of vendors out there that deal in teas more exclusive than these mainstream vendors you named, with prices to match. Higher prices are here to stay. You gotta remember the demographic changes – the number of potential customers for pu has gone up exponentially in the past ten years. The price rise is not just a function of quality.

Even for Mangfei, that went up XXX% this year? Understood that there are exclusive labels, saying that CSH and their sort is very probable to decline. As well as places like Banuo, Dahusai, and other places in Mengku.

marshaln on April 13th, 2007 02:44 am (UTC)
Unfortunately, in a market where there are people with, literally, million dollar budgets buying puerh for investment, this is what happens. Demand far outstrips supply and in the end what you get is a very fast price rise.

There are a number of shops in Beijing that are now closed for business because 1) the owners want to wait till spring tea comes down before opening up again to sell at a higher price, or 2) they don’t have enough money to repurchase stock for their store, and so decided to just sell everything they’ve got and leave the business.

It used to be that with about 100k RMB you can start a puerh shop stocked with tea. Depending on what brand you work with, that might still be possible, but it’s getting increasingly difficult. Capital investment becomes more intense as the market keeps going up.

No market ever sustains 50 or 100% price rises year on year for very long, and I can’t imagine puerh being the exception to this rule. There will be a time, not too far from now I think, that the prices for new teas will slow in its rise and becomes more normal. Only then, I think, will futures make sense. Right now, if you have puerh futures for 08 tea, it will be 50% more 07’s prices, at least.

To think though — those people with million dollar budgets (this is USD I’m talking here) will need to liquidate some of their holdings at some point to earn a return on their investment. When teas like the flood the market… prices will stabilize.

I have a feeling the day that happens is also the day when capital flow between China and the rest of the world loosens up, and foreign exchange becomes less controlled as it is now. Nobody knows exactly when that will be, but it shouldn’t be in the too distant future. Right now China suffers a liquidity glut worse than the rest of the world because capital controls make it impossible for Chinese to invest in foreign assets. This is why you see those dramatic rises in the stock market, and I think the tea market suffers, if ever so tangentially, from the same ills. There’s no place to park their money other than bank accounts with dismal returns, so investment in these cakes that magically increase in value year after year, often bettering most securities, seems pretty good. There will be a moment when prices for new tea peak out, and from then on… who knows what will happen.

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There isn’t anything ever wrong in saying that the *demand* can keep this up, you know. Not quite. The issue is that the full bore Minksy effect is making the tea business as a process impossible to fulfill. When the intermediaries can’t flex things where they’re supposed to go, providing open and transparent market info (properly connected to tea grade), the speculative interests can only implode. Just how many people are ever going to pay $80-$150 a cake for something from Yongde, assuming not the best, just average 100yo tree tea? The big money cares about face, and the big money cares about the best of the best, and it will always ultimately narrow down the field of what tea matters. The money will be spent pushing up GFZ up past nosebleed territory, and not, say, Lancang Pasai. So teashops somehow has to promote Pasai as a great place to get tea from, just like the work Bannacha does in trying to promote Bangdong Matai. Margins get eaten up. Interest goes down (why bother? You can’t afford or maybe even *get* anything real except for oh-so-obviously-second-rate places), and sooner rather than later, some crisis or other, like SARS, will force the weaker hands to sell at what price stuff gets sold. Only so much of the good stuff, the truly good stuff, so that will get snapped up. The rest, though…

As long as your average 100yo tea trees are still better than the plantation stuff, and when your plantation stuff already costs $40 a cake (or more) you bet $80-150 for crappy 100yo tea will not only be here to stay, but rise in the future as long as prices keep going up for everything else. There will be a point where substitution effect kicks in and pu gets too expensive generally, but I think we’re probably not there yet.

My opinion is we are not even close to the prices the market will sustain, when comparing what people pay now for carbonated beverages and bottled waters, to say nothing of wines, spirits and coffees. I wonder how many folks who think tea is expensive plunk down $3 for a liter of Coca Cola to be drunk in a day or so, or the same for a mere 16 oz of Fuji water, gone in an hour. I live in the land of cheese heads and 24 hour or less milk from the cow and, heavily subsidized, milk is over $3 a gallon, and gone in a couple of days for most families. Even if tea is considered a luxury, it is an inexpensive beverage still, barring the crazy thousands of pounds sterling oolongs at auction. As a hobby, tea isn’t near the cost of golf, or even knitting, when a cheap yarn is $5 a skein and you need 30 of them to make a blanket. I think before we ever hit the ceiling on tea, the environment and global climate factors are likely to turn tea into an indoor production, and the tea farms as we know them now will be reserved or preserved within the countries lucky enough to still have them, and none of the tea we can buy now will be exported. When that day comes, I will probably be drinking greenhouse tea here in the States, if I plan to drink tea at all anymore.

A lot of people in the online community seem to think that a new 2014 cake for $180 or more is insane, regardless of quality.
As someone who’s tasted a lot of things that aren’t available to the online market, I’d love to hear your opinion on the 2014 Yiwu on 2dogtwo’s site (http://www.white2tea.com/tea-shop/2014-last-thoughts/).

Would it be above the average of what online vendors usually offer, taking into account the quality as well as the price?

I have never tried it, so I can’t tell you if it’s any good. $180 for a middling cake is pretty normal these days though, so people need to adjust their expectations when it comes to buying new puerh tea.